Monetary policy not yet easing

Investors will be able to deduct 80% of their interest expenses from rental income starting from April one next year with 100% deductibility a year after that. 80% is as good as 100% in the minds of most people therefore it seems reasonable to expect more investors to return more quickly.

But we still have the same problem I mentioned four weeks ago. Landlords face rapidly rising and high costs for running their rental businesses. Concerns continue to grow about rising maintenance costs, insurance premiums, and council rates. This is understandable in light of reports for instance of 30% increases in insurance premiums in the Wellington region being implemented at the moment, plus councils warning about further substantial increases in rates in order to cover deferred maintenance costs.

The Reserve Bank have just conducted their regular review of the official cash rate and surprised no one when they decided to leave it unchanged at the 5.5% level it was taken to at the end of May this year. Inflation in New Zealand has fallen and now sits at 5.6% compared with 7.3% over a year ago. But this rate is still much too high and a key thing which the Reserve Bank needs to see happen before they can be confident that inflation will continue to fall away at a strong pace is for the moment simply an article of faith.

The pace of wages growth is highly likely to slow down rapidly as a result of the substantial easing of labour market conditions over the past year. Record net migration inflows have given employers much more choice when it comes to finding staff and economic theory tells us this improvement in the demand and supply interaction will generate slower wages growth.

But as yet there is little statistical data showing that wages growth is in fact slowing down. And that is where 5.6% inflation becomes a problem. There is no ability at the moment for the Reserve Bank to take the risk of backing economic theory and cutting interest rates.

With a reasonably muted outlook for the New Zealand economy next year including falling house construction and poor growing conditions in the farming sector we can reasonably expect the rate of inflation to fall away towards 3% within 12 months. That means we can also expect falling interest rates. And in fact come the next review of the official cash rate at the end of February next year we will hopefully have solid proof of slowing wages growth alongside further declines in business pricing intentions. If we do get these things and if the inflation trends overseas continue to look good then we might get our central bank signalling a cut in the official cash rate in the second-half of 2024.